Conservatives are beginning to realize that the big banks are no friends of free markets, and presidential candidate Jon Huntsman is among the first Republicans to try to do something about it.
To date, Huntsman, a cosmopolitan Ivy Leaguer who served as President Obama's ambassador to Beijing, was most noteworthy as the favorite Republican candidate of the liberal elites, but his latest proposal gives off a whiff of free-market populism.
"What we have now is socialism," Huntsman told me Wednesday. "Capitalism without failure isn't capitalism. That's what we have now in the banking system." Huntsman has proposed to protect taxpayers from future bailouts by, in effect, breaking up the banks that are too big to fail.
The biggest banks were the prime culprits in our 2008 financial panic. They borrowed cheaply, in part because senior creditors expected a bailout, and they pushed risk-assessment to the side while making huge leveraged bets using bailouts as a backstop. George Mason economics professor Tyler Cowen says, the banks "bet against unlikely events" like a massive downturn in housing. As long as housing didn't collapse spectacularly, they profited. When it did, government suspended the free market and bailed everyone out.
So, in today's bailout economy, big banks make money not necessarily by providing liquidity to the most economically promising sectors, but often by structuring their bets so that there's profit on one side and bailouts on the other. The more they do this, the bigger they get. The bigger they get, the less willing politicians are to let them fail, which lets them borrow even more cheaply, meaning they make their bets on even more leverage, making more creditors and insurers dependent on the big banks' continued health.
Big banks are both the consequence and the cause of big government. But so far, it's mostly been liberals who have spoken about breaking them up or reining them in. During the 2010 debate over the Dodd-Frank financial regulation bill, Democratic Sens. Ted Kaufman and Sherrod Brown proposed a bill to cap the size of banks. Only three Republicans voted Aye, and the proposal failed 61-33.
"My whole basis on this," Kaufman, now retired from Congress, told me this week, "is the free market argument: How can you compete with this?" The banks' government-inflated size drowns out free-market forces.
Kauffman says Republicans wouldn't back him because they had made a decision to oppose everything. But one driving factor was a Republican misperception that it was anti-capitalist to begrudge banks their size. "What [Brown-Kaufman] says is," then-Sen. Judd Gregg objected at the time, "if you're successful ... you're going to break them up."
Gregg was redefining "successful" to mean "propped up by an implicit bailout." Gregg, it seems relevant to note, now works for Goldman Sachs.
The Federal Reserve and the Obama administration don't mind the size of the big banks. In fact, they find their enormity helpful. Bloomberg News reports that Obama administration officials, during the debate over Brown-Kaufman, bought into the big bank lobbyists' arguments that the banking leviathans provide great economies of scale and stability. Also, if you're a central banker or a politician with central-planning dreams, industry consolidation makes things easier for you.
(Consolidating the industry is exactly what Washington has done with its string of bailouts and regulations. The six biggest banks now control 63 percent of the financial sector's assets, up from 50 percent before the bailouts.)
Huntsman rejects the Obama-Gregg position. "There is no evidence that institutions of this size add sufficient value to offset the systemic risks they pose," his website states. Scholarly work actually suggests that the only advantage the big banks gain after a certain size is political advantage.
Cries to "leave the banks alone" are instances of misplaced laissez faire. Given the FDIC, the Fed, and implicit bailouts, banks are already operating on the taxpayer dime -- so to some extent, the taxpayer has the right to call the tune. Huntsman would impose a fee on banks above a certain size. Proceeds would not go to a bailout fund, but they would make room for broad-based tax cuts.
Huntsman's plan to take on the big banks is part of a broader goal he has of "wiping clean corporate welfare and subsidies." A few other Republican candidates have shot barbs at the banks, mostly Ron Paul, but also Rick Perry.
But frontrunners Mitt Romney and Newt Gingrich generally defend big businesses even when their profits stem from government intervention. Romney has already raised $4 million from the securities and investment industry, according to the Center for Responsive politics.
Huntsman lags badly in the polls, and he'll never match the frontrunners in fundraising. But his conservative distrust of the banks is spreading.
Timothy P.Carney, The Examiner's senior political columnist, can be contacted at tcarney@washingtonexaminer.com. His column appears Monday and Thursday, and his stories and blog posts appear on ExaminerPolitics.com.
